Drilling Rules Hit Trans-Alaska Pipeline

(Dow Jones Newswires), June 14, 2010

The federal government's new wariness about offshore drilling in the wake of the Gulf of Mexico oil spill is dimming what may be the best hope for extending the life of the Trans-Alaska Pipeline, a crucial artery supplying one-quarter of the West Coast's oil.

The 800-mile pipeline, owned by a BP-led consortium, carries about 670,000 barrels of oil a day -- 13% of U.S. production -- from Alaska's North Slope the length of the state to Port Valdez. From there it is sent by tanker to refineries in Washington and California.

That is a lot less than the two million barrels a day the pipeline carried at its peak back in 1988, because of a rapid -- and probably permanent -- decline in Alaska's onshore oil production.

Volumes may fall low enough to halt operations by the middle of the next decade without an expensive modification of the pipeline to handle less oil. At a reduced flow, oil in the pipeline can freeze or form into a waxy buildup, raising the risk of interruptions and spills.

Offshore oil production could help refill the pipeline just when the flow from the North Slope is projected to reach critical lows.

But Alaska politicians, industry consultants and analysts question whether tight new regulations in the wake of the oil spill in the Gulf might discourage offshore drilling in the Arctic, removing that as a way to postpone the Trans-Alaska Pipeline's decline. The federal government has already ruled repeatedly that opening new onshore areas, such as the Alaska National Wildlife Refuge, to drilling would exact too great an environmental cost.

On May 27, President Barack Obama ordered a six-month offshore drilling moratorium in the wake of the April explosion and sinking of the Deepwater Horizon rig, which killed 11 workers and started oil gushing into the Gulf. The rig was leased by BP. The president also commissioned an independent panel to recommend new offshore energy regulations.

The West Coast relies heavily on the pipeline for a cheap, domestic source of crude, and the region will need to pay a premium to ship in increasing amounts of foreign oil if Alaskan production continues to fall.

The rest of the nation would miss those volumes too. Oil prices spiked in 2006, when an oil spill in a BP-operated Alaskan field briefly threatened to cut off half of the state's production.

"The way I think most Alaskans feel, the federal government won't let us go to the east onshore, they won't let us go to the west onshore, the only place to go is offshore, and they won't let us do that now," said Kurtis Gibson, deputy director of the Alaska Division of Oil and Gas.

Royal Dutch Shell was awaiting the Interior Department's final approval to drill up to five offshore wells this year when the moratorium was put into effect. The ban effectively postpones any work in Alaska until at least next summer, as sea ice prevents winter drilling.

The oil spill has also rejuvenated a campaign by environmental groups and native coastal villagers to reduce the area of the Arctic open to oil exploration and overhaul drilling regulations. A few weeks before the Deepwater Horizon disaster, the White House had expanded its plan to sell exploration leases in Arctic waters.

Oil producers warn that uncertainty about drilling in the Arctic may scare off oil companies willing to pay billions for a chance to find some of the last untapped U.S. oil reserves.

"Changing lease-sale schedules disrupts the certainty and consistency that industry needs for planning such investments for leasing and ensuing exploration and development," Geoffrey Haddad, ConocoPhillips' manager of Alaska exploration wrote in a letter to the Interior Department dated May 3.

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